In 1994, a legal scholar and cryptographer named Nick Szabo realized the need for decentralized ledgers and its use in smart contracts, blockchain contracts or digital contracts. Using such an innovative construct can convert contracts into a computer code, stored, replicated and supervised on the blockchain network. This will also result in ledger feedback such as transferring money and receiving the product or the service.
What Is A Smart Contract?
Basically, a smart contract helps you exchange money, property, shares or anything that has value in a transparent manner thus avoiding the services of a middleman. Take for instance a smart contract in the form of a vending machine. You would go to a lawyer or a notary, pay them and wait till you get the document.
With the use of a smart contract through blockchain, you can drop a Bitcoin (Cryptocurrency) into a vending machine (Ledger) and driver’s license or other identity proof documents drops into your account. Moreover, a smart contract not only defines the rules and penalties in an agreement, the same way as a traditional contract does, but also automatically enforces these obligations.
Characteristics Of Smart Contracts
Trust: Smart contracts are encrypted on a shared ledger. There is no possible way that someone can say they lost a copy of it.
Safety: Cryptographic encryption in the blockchain, keeps your data and documents safe. The eliminates the risk of hacking. The cryptographic hash function is used to map and secure data of any random size. The values of a hash function are called hash values, hash codes, or digests.
Autonomy: Smart contracts enables an individual to make sign and create any agreement on his own. Thus, the need of a lawyer, broker or other authorities to confirm the contract is not necessary. This also removes the risk of manipulation by a third party, since execution is managed automatically by the network.
Backup: Take for instance your bank has lost data of your savings account. Using the blockchain your data will be duplicated and made available to users on the blockchain.
Speed: You would have to spend plenty of time and paperwork to manually process documents. Smart contracts use software codes to automate tasks which will help in time saving and cost saving aspects.
Saving: Smart contracts help you save money/brokerage fees by knocking out third party people in a business transaction.
Accurate: Automated contracts are not only faster and cheaper but also avoid errors that come from manual filing of contracts.
Areas In Which A Smart Contract Can Be Used
Government ledgers can be protected via a blockchain and made available to all in the blockchain network. The hash function encrypts data and makes it difficult for hackers to decode it as the file may be shared to more than one user on the blockchain network. Instead, a hacker requires excessive computing power to hack the data files, contracts etc. With smart contracts, volunteers can transfer voting ledgers into the blockchain network. This will help in better transparency.
Imagine the future of the human race having everything automated into a digital realm of gettings things done instantly and with ease. Google’s smart glasses and smart cars have started a revolution in the smart business space to make machines think, act and feel like humans. This is where smart contracts come into the picture. Using smart contracts, an automobile insurance company could charge rates differently based on where, and under what conditions customers are operating their vehicles.
If you want to rent your apartment, you will need to pay an advance or brokerage fees to a middleman. Online ledgers available on the blockchain cuts your cost and pay using a bitcoin and encode your contract on the ledger. Everyone on the network can view the data and you can accomplish automatic fulfillment. Brokers, real estate agents and all who are associated with the property can profit.
Personal health data and record stored on the blockchain network consist of a private key which will grant access only to specific individuals. Receipts of surgeries will also be stored on the blockchain network and automatically sent to insurance providers as proof. This will help in storing documents online and can be used for general health care management such as supervision over drugs, regulation compliance, testing results and aso managing healthcare supplies.
Legal Issues Surrounding Smart Contracts
Technology comes with positives and negatives just as humans are prone to committing mistakes. Similarly smart contracts are far from being perfect. Questions such as what if bugs (errors) get into the code? How should governments regulate such contracts? Or Will such contracts be taxed by the government? are some general questions that crop up for the common man.
Incase this were to be a traditional contract, one can go to court and file a lawsuit against wrongful doings. The same would remain a questionable matter when it comes to the blockchain. The list of challenges continue to expand as the concept of blockchain is budding in today’s digital era.
Futuristic Use Of Smart Contracts
Smart contracts will impact the legal industry such as law. In this case, lawyers can adapt towards creating standardized smart contract templates similar to that of traditional contracts. Other industries such as credit companies and merchant acquirers may also employ smart contracts for tasks such as real-time auditing and risk assessments. This will digitize the traditional way contracts/ agreements are created.